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Comprehensive Paper Presents Upside of Active Management

A new paper from the Active Managers Council aims to present a more “balanced narrative” on active fund management. “Active and passive strategies can happily coexist and both offer distinct benefits. Only when investors abandon the false dichotomy that one is good, the other bad, will they be able to build more optimal portfolios,” the authors write. The paper “challenges the conventional wisdom driving the three most common criticisms of actively managed investments: that active managers don't outperform their indexes, that active managers can't outperform their indexes, and that identifying above-average active managers isn't possible.” The authors examine: the factors that drive relative performance between active and passive investing; the methodologies for comparing the two approaches, and they argue that passive investing is raising the bar for active managers. The paper is largely optimistic and views the rise in indexing as a “call to action” for active managers. The authors see opportunities for active managers: (1) to better align their fees with their ability to generate excess return and improve net performance (2) reduce costs and increase discipline and efficiency (3) create more differentiated portfolios and (4) offer better risk management in a down economy.

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